Jim Armitage: The $1bn deal that has Schroders
looking down the barrel of a gun
Michael Dell should take out his iPad and watch The Artist, the 2011 Oscar winner
Decisions, decisions for the fund managers at Schroders Investment Management. Their quandary: do they or don’t they want to be shareholders in the company whose assault rifle was used to massacre 20 schoolchildren in Connecticut in December?
It’s a tough old question. Bushmaster, which advertises its wares with the slogan “Bushmaster offers everything you need to ensure the safety of you and your family”, was put up for sale immediately after that slaughter. Cerberus, the fund manager that owns it, decided it had better sell up sharpish after teachers whose pensions it was investing complained.
Among those expressing an interest in bidding is Sturm Ruger, a maker of similar weapons, in which Schroders is a major shareholder.
I suspect Schroders would give the $1bn bid its backing. It displayed a notable lack of squeamishness about guns ’n’ ammo in the days following the Connecticut massacre when, instead of sticking its head down and letting the fuss blow over, or even selling its 58,400 Sturm Ruger shares, it went on a buying frenzy, snapping up 140,000 more and taking it into the top 20 of shareholders.
Barclays and Flemings will also be paying attention to the Bushmaster auction. Their funds are in Sturm Ruger and in Smith & Wesson, which made the assault rifle used by James Holmes in his killing spree at a cinema in Aurora, Colorado, last year.
Smith & Wesson has also expressed an early interest in bidding for Bushmaster. Perhaps it is hoping to pick up some design tips. Holmes’s Smith & Wesson jammed mid-slaughter, and he had to switch weapons. In Connecticut, Adam Lanza’s Bushmaster didn’t.
... as the weapons bulls face a quandary
There’s a wider dilemma this week for those considering investing in guns-and-ammo shares. The Boston bombings sent Wall Street brokers firing off advice to clients to buy them. America is under attack. People will want to tool up.
Doubtless those action-movie images of rifle-wielding Swat teams will also get the gun nuts pulling the trigger on big purchases, too: “I want what that guy in the Kevlar’s got.”
Also backing the arms bulls this week was the refusal of senators to pass even the most minor revision to America’s gun laws. The right to bear machine-guns without background checks into one’s mental health continues to be enshrined in the constitution.
Smith & Wesson shares leaped almost 3 per cent in the immediate aftermath of that bit of good news. So why are investors in a quandary?
Firstly, gunmakers’ shares have risen hugely over the past couple of years, largely because of successful new marketing policies of the manufacturers and concerns about crime. That has left them looking pretty expensive, with little sign of what might drive them higher.
Meanwhile, sales have spiked since Connecticut as gun lovers stocked up their collections of assault rifles, fearing a ban. It’s now highly possible there will be a lull, as has happened previously after legislative action provoked people to stockpile .
More importantly, weapons investors fret about the overall spending cuts planned for the Pentagon’s defence budget. Estimates suggest Washington will chop about $13.5bn from America’s military adventures under the sequester. Much of that will come from reduced spending with the arms manufacturers.
Also, investors have to gauge whether reforms to gun laws will be back on the agenda in Washington soon. This latest law only failed by the narrowest of margins, and President Obama was clearly furious. It’s not hugely likely, I’ll admit, but we could see another, more concerted effort after the next massacre.
Be careful, Mr Dell – the PC has had its day
Michael Dell is not a man without ego. I’d wager it’s similar in size to his wallet. I’d also bet he is a happy man this weekend, having seen Blackstone walk away from bidding against him for the PC maker that bears his name.
However, I fear he may rue the day Blackstone packed its bags. While it means he’ll be able to buy back his old business for less now the competition has hopped off, it is hard to see how this takeover can bring anything but tears. Those close to Mr Dell and Silver Lake, his co-investor, will tell you Blackstone was never a serious bidder, having not done much in the way of technology takeovers of this size in the past.
But I can’t help thinking we should be taking notice of Blackstone’s worries, so succinctly put in its letter to the computing giant. It said it was pulling out because of “the rapidly eroding financial profile of Dell” and the fall in the market for PCs by an “unprecedented” 14 per cent. That slide was “inconsistent with management’s projections for modest industry growth”.
Who can argue with that?
PCs are in inexorable decline. Tablets and smartphones will continue eating Dell’s core market. PC prices are tumbling, Dell’s cashflow is falling. These trends seem unstoppable.
This evening, Mr Dell should take out his iPad and watch The Artist, the 2011 Oscar winner about an egotistical silent movie star’s attempt to battle the talkies. Needless to say, the plan does not go well. Mr Dell should quit while he is ahead.
Got to be wary on this pledge from Goldman
Lunched with one of the City’s most senior fund managers this week. He seemed a mild-mannered chap until I happened to mention Goldman Sachs, the US investment bank some know better as the Vampire Squid. The extent of his loathing was quite fabulous to witness and reminded me that the Goldmine has not had its usual run of bad press lately.
So I thought I’d better mention a sideline from this week’s profit figures. There’s a measure of the riskiness of their loans and investments known as Basel III that US investment banks will soon have to disclose by law. All the other Wall Street firms started disclosing the figure last year. But not Goldman.
Fortune magazine reports that an analyst asked on a Goldman conference call if it could at least say if its Basel III figure had risen or dropped. Answer came there none.
That’s an arrogant way to behave, especially given the growing concerns that banks are back making the same kinds of risky bets that blew up the world in 2008. A previous measure being phased out, known as Basel 1 – which Goldman does disclose – shows its riskiness surging 20 per cent in the first three months of the year. It blames that on an accounting change by the regulator, but those of other banks jumped nowhere near as much.
Goldman says it is cutting its risk levels. We should be sceptical.
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